With private sector investments almost absent in the past few years, it has been a tough time for India’s capital goods segment. In one of the toughest years, however, Larsen & Toubro (L&T) has managed to maintain steady revenue growth, profitability and inflowof orders.
The company’s diversified work portfolio, its top management said, has helped it keep up the momentum. As a result, its revenue grew 18 per cent year-on-year (YoY) to Rs 1.41 trillion, while net profit was up 21 per cent to Rs 8,905 crore in FY19.
Analysts tracking the company say L&T has consistently been delivering in terms of winning orders and strong order execution, though with some temporary concerns about working capital management owing to tight liquidity. The brokerage firm JPMorgan has noted in its investment thesis that the company has displayed a strong earnings growth track record at 27 per cent over FY15-FY19.
The conglomerate’s strategic choice of a diversified work portfolio has helped. For instance, in the December 2019 quarter, L&T’s infrastructure revenue declined YoY — a first since the company started reporting numbers for this segment. Despite this blip, the company’s consolidated gross revenue for the same period grew 6 per cent YoY, as it saw double-digit revenue growth in segments like hydrocarbon and engineering and construction.
“The big-ticket projects are missing. The profile of the organisation and the kind of jobs that we are into have changed. So, we are getting more hydrocarbon, water, power transmission and distribution jobs. Buildings and transportation jobs are less, but that’s the advantage of being a group which is into many aspects of projects,” says S N Subrahmanyan, chief executive officer and managing director, Larsen & Toubro.
The diversification strategy has helped maintain a healthy order inflow growth. L&T’s order book crossed the Rs 3 trillion mark this financial year. For the past two financial years — FY18 and FY19 — the company outdid its own order booking guidance. In FY19, it revised its guidance to flat growth, but ended the year with a surprise 7 per cent growth in order inflow. The company has guided for another 10-12 per cent growth in order inflow for the current financial year. While analysts remain skeptical about L&T meeting this guidance, the management remains confident.
As part of its larger strategy, the company also aims to focus on execution of better cash flow projects. The management, in its January earnings call, also added that it has been mainly focusing on multilaterally-funded projects.
For the September and December 2019 quarters, international orders contributed significantly to the YoY growth in order inflow. Growth in domestic orders, on the other hand, remained muted for a good part. At present, more than half of L&T’s international order book is from West Asia. Alive to growing challenges there, L&T has also tapped opportunities in newer geographies. Its forays in select African countries, Bangladesh and Sri Lanka have started yielding results, with non-West Asia business contributing around 45 per cent of the international order book.
A sign of Larsen and Toubro (L&T) is placed on a road divider in Mumbai | Photo: Reuters
Between FY14 and FY19, L&T’s returns ratios have seen a marginal improvement. Analysts hope that with its asset monetisation drive, this is bound to change. “Monetisation of non-core assets will help the company release capital and improve returns ratios,” analysts with Anand Rathi stated in their outlook on the company.
L&T’s sale of its electrical and automation (E&A) business to Schneider Electric for Rs 14,000 crore is expected to strengthen its financial position. JPMorgan expects measures like working capital control, better execution, divestment and payouts to help the company meet its medium-term return on equity goal of 18 per cent.
In addition to the exit from the electrical and automation business, the company has also been successful in monetising its road assets through the infrastructure investment trust (InvIT) route. In its FY19 annual report, L&T noted: “In FY19, we successfully divested five road assets to an infrastructure investment trust (InvIT) and a container port (in Kattupalli, Tamil Nadu) as part of our wide-ranging efforts to enhance group return on equity.”
Last year L&T also acquired a majority stake in Mindtree, in its second attempt to fulfill its information technology (IT) ambitions. Analysts back then had pointed out that greater focus on the services business is what L&T believed would secure the desired higher return on equity. After the acquisition announcement, Subrahmanyan had told Business Standard, “With this acquisition we will have a $3 billion IT business and may be that will give us some respectability from the scale point of view. And it may also give us a front seat at NASSCOM.” He expects the Larsen & Toubro’s information technology services segment to continue growing at 15-16 per cent yearly.